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A substantial number of U.S. public companies are having trouble getting set for their
first use of broad revenue reporting rules—even at this late date.

“The lack of readiness is just about universal”—meaning it cuts across commercial
sectors, Tony Sondhi, a financial analyst and head of A.C. Sondhi & Associates LLC,
of Safety Harbor, Fla., told Bloomberg Tax. “It’s pervasive,” said Sondhi, a consultant
for developers of software for revenue reporting and lease accounting.

For many companies, the rules promise a change in the timing and amount of revenue
to be reported at a particular time—important elements in quarterly and annual reports
on earnings.

The Financial Accounting Standards Board issued the revenue standard, ASC 606, nearly
four years ago. The International Accounting Standards Board issued similar rules,
IFRS 15, at the same time. The rules took effect Jan. 1.

New Accounting in April, May Earnings Releases

U.S. public companies that report on a calendar-year timetable are required to apply
the FASB’s one-stop revenue guidance to results for the current quarter. They will
reflect the new accounting in reports issued in April and May.

Revenue is deemed the most important line in the financial statements. It serves as
a gauge for not only stock analysis and valuation, but also plays a role in figuring
executive compensation. It also can affect accounting for taxes and costs of obtaining
customer contracts, say CPAs and analyst groups, such as CFA Institute, of Charlottesville,
Va. The chartered financial analysts group issued a revenue accounting Q&A for investors
Feb. 26.

The new revenue rules likely will improve the financial results of many life science-sector
and technology companies in first-quarter earnings reports, accountants at the financial
reporting research firm Audit Analytics wrote in a March1 blog. The brighter pictures
would stem from product licensing.

Securities regulators are monitoring first use of the revenue rules.

Last year, Securities and Exchange Commission accountants flagged some companies,
including Ford Motor Co. and Google-parent Alphabet Inc., about disclosures on revenue
that the SEC staff regarded as problematic.

Other Companies Prepared, Ready

Revenue accounting specialists at two of the Big Four firms said that while some companies
appear to be behind in preparing to comply with the sweeping standard issued in 2014,
many are on track to apply the rules effectively and reflect the new accounting in
their first-quarter reports.

At the same time, Knachel said Feb. 27, “a significant number of companies” haven’t
finished their preparation for reporting under the new regime as of Jan. 1.

Snags Over ‘Non-Systematic Transactions’

Those companies continue to wrestle with how to treat revenue from what he called
“non-systematic transactions.”

Those transactions are “one-off,” less routine deals for goods or services with customer-specific
contract terms, Knachel said. The extra elements—items such as up-front fees charged
by telecom companies and variable payments, common in the biopharma sphere—prevent
a company’s systems from handling such transactions.

The “big surprise,” Knachel said, is “the extent to which these one-off, or non-systematic,
transactions remain open for resolution at this stage of the game.”

“This is the big issue” in pending revenue work, he said. “This is what I think is
causing concern and anxiety for companies.”

‘Working Hard Until Finish Line’

Analysts and accountants predict that many companies will see an acceleration of revenue
from use of the new rules. Other companies might not see much change in practice.

In addition, some types of revenue that previously were reported earlier in reporting
cycles will be deferred, Anthony Burzinski, a managing director for accounting advisory
services at KPMG LLP, told Bloomberg Tax March 1.

“There’s a wide spectrum of readiness,” Burzinski said of the outlook among companies
for use of the new rules. A lot of companies “are going to be working very hard up
until the finish line,” he said.

Gross Versus Net Issue Dogs Companies

Determining who the principal or agent is in revenue-generating contracts, which has
big impacts on whether revenue is booked on a gross or net basis, is still a challenge
for companies, Deloitte’s Knachel said.

The gross-versus-net issue figures in drop shipments of drugs, medical devices, computer
hardware and software, telecom gear, and retail items such as household appliances,
he said. With drop shipments, the customer places an order from a distributor and
the distributor places the order with the manufacturer.

“That’s a big area, probably one of the biggest we’re seeing right now,” Knachel said
of gross-vs.-net display issues.

On Disclosures, Much Work to Do

For all public companies, footnote disclosure tasks will be bigger under the newly
effective revenue rules.

New disclosure requirements—particularly those on “backlog,” or deferred revenue—are
proving problematic for companies, Sondhi told Bloomberg Tax March 1.

CFA Institute is “a little worried” that at least some of the new revenue-related
disclosures “will be qualitative and boilerplate,” the institute’s head of financial
reporting policy, Sandy Peters, said.

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